Professional Pensions and Aviva Investors bring you the latest insights on real assets, from demand patterns to key investment drivers
Real assets in a shifting landscape
Investors are upbeat on real assets even as interest rate path remains unclear
Investors expect good returns from real assets this year, especially in real estate equity and infrastructure, but uncertainty around inflation and interest rates clouds the future
Real asset investors continue to favour environmental, social and governance (ESG) factors, especially sustainability in real estate
Real asset investors see returns in sustainability
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Appetite for real assets remains strong, as investors embrace the asset class for diversification, inflation-linked income and ESG impacts
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Interest in sustainable investing is continuing to strengthen among real asset investors, but barriers around the sector risk disrupting further progress
Sustainable appetite strong among investors, but challenges remain
Despite their inflation protection and diversification qualities, real assets’ vulnerability to sustained high interest rates is the top concern for most investors
High rates the biggest concern for most real asset investors
Valuations are attractive for investors with a long-term mindset...
In the past year, investors navigated challenges amid the largest inflation shock in decades, prompting central banks to raise policy rates significantly. Macroeconomic uncertainty impacted all asset classes, including real assets. The UK and Europe saw a repricing period in real estate, offering strategic opportunities for long-term investors. Infrastructure debt, with its defensive characteristics, remained resilient. Our survey of 500 institutional investors across Asia, Europe, and North America, overseeing $3.8 trillion, explores their insights on asset allocation, risks, opportunities, expected return forecasts, and attitudes towards sustainable real assets, including net-zero targets.
Daniel McHugh Chief Investment Officer, Aviva Investors
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As higher interest rates and the risk of global recession continue to loom over markets, global interest in real assets remains robust, fueled by diversification, income, and ESG considerations
What's next for real assets in an evolving macroeconomic landscape?
One consequence of the challenging market environment last year was to reinforce the value of real asset portfolios in providing diversification and uncorrelated returns
Real Assets: Global institutions looking for diversification and income
The last year has created both challenges and opportunities for investors. Developed market central banks have increased interest rates to their highest levels since the global financial crisis to contain the largest inflation shock in decades. Macroeconomic uncertainty, along with geopolitical tensions, are still key risks and will continue to pose challenges for investors in all asset classes, including real assets. Institutional investors marginally reduced their overall real asset allocations in 2023, likely due to market falls and perceived risks in certain sectors. Real estate, for example, underwent a slow, and, for some, painful repricing in the UK and Europe, two regions where transaction activity fell significantly. However, appetite for future real assets investments looks strong and continues to be driven by the search for diversification, inflation-linked and long-term income and positive environmental, social and governance (ESG) impacts. Globally, nearly two-thirds of investors expect to increase their allocations to real assets over the next two years, with investors in Asia most likely to add to their portfolios. Real estate equity remains the most popular strategy by far, though exposure has fallen slightly, from 31% of the average institutional real asset portfolio three years ago to 27% today.
As higher interest rates and the risk of global recession continue to loom over markets, global interest in real assets remains robust, fueled by diversification, income, and ESG considerations, according to Aviva Investors’ Real Assets Study 2024.
How is your institution's real assets portfolio allocated today?
Most investors, about 64%, say that diversification is a primary reason for allocating to real assets. The tumultuous performance of markets in 2022 and much of 2023 likely reinforced the value of the asset class as a source of uncorrelated returns in portfolios. On the other hand, with inflation falling in the major global economies, inflation protection is expected to dip in importance in the next two years – from being a key reason to invest for 53% of respondents in 2022 to 50% this year and 43% in two years. As inflation trends down, long-term income and a positive ESG impact are set to rise in importance for real asset investors; these are seen as key drivers of demand in two years’ time by 51% and 39% per cent of investors respectively. Changing inflation expectations and bond market gyrations are potential factors in this shift, with real assets seen as providing a secure income in volatile times.
Diversification remains a key driver
What is your primary reason for allocating to real assets today, and what do you expect to be the most important driver in the next two years? (select the top three)
Investors expect to see improving returns over longer periods across asset classes. For example, on average, respondents expect real estate equity returns to be around 3.2 per cent over one year and reach 6.3 per cent over five years (these figures are based on weighted averages for expected returns, calculated using illustrative return bands). This expected rise in returns assumes markets will recover, particularly in real estate, which currently faces rising debt costs, and reduced demand in some sectors such as offices and retail. Infrastructure equity and debt both see return expectations rise significantly too, which could reflect emerging markets’ large infrastructure needs and global requirements to build the necessary infrastructure for climate change mitigation and adaptation.
Real asset returns
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Looking ahead to the next 12 months, 60% of investors see high interest rates as the biggest risk for real assets. Global recession is another pressing concern, particularly outside Europe. Meanwhile, just over a third of investors say that liquidity risk is a major worry, rising to nearly half of North American investors.
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Investor appetite for real assets remains strong and the asset class continues to play a significant role in the investment strategies of global institutions. Among those institutions with an allocation to real assets, almost half devote more than 10% of their portfolios to these investments. By region, North American institutions remain the biggest investors, with 24% allocating a fifth or more of their portfolios to real assets; the equivalent figures are 14% in APAC and 12% in Europe.
One consequence of the challenging market environment last year was to reinforce the value of real asset portfolios in providing diversification and uncorrelated returns, according to Aviva Investors’ Real Assets Study 2024.
A challenging macroeconomic backdrop put some sectors such US commercial real estate under pressure in 2023, due in part to the knock-on effects of higher interest rates. However, real estate equity remains the most popular strategy among the institutions surveyed, even though it takes a smaller share of their portfolios, at 27% on average, compared with 30% a year ago. Meanwhile, infrastructure debt and infrastructure equity now account for a larger share of real asset portfolios, at 11% and 14% respectively. Allocations to real estate debt and real estate long income have also risen, to 11% and 12% respectively, since 2022. Despite the slight dip in overall allocations to real assets last year, most institutions remain committed to investing more in the asset class over the next two years. There are, however, regional nuances. The proportion of APAC and European institutions planning to boost allocations has risen over the past year, while fewer North American institutions plan to increase their exposure compared with a year ago. In terms of how institutions are seeking to gain exposure to real asset markets, direct investment continues to be the preferred option among most channels. Surprisingly, larger institutions are not necessarily more likely to seek to invest directly than their smaller peers.
Real estate equity remains the most popular strategy
What is your preferred way of investing in real assets? (select up to three options)
Change is already on the horizon for Defined Contribution (DC) pension funds. The proportion of DC pension schemes looking to boost their allocation to real assets now stands at 69%, up from 51% in 2022. This is likely to be a consequence of the steps regulators, governments and investors are taking to address the structural and operational considerations that have historically been seen as impediments to DC schemes’ investing. Half of these funds already offer access to real assets through default funds, and a growing trend suggests an expansion of such offerings in the future. This could allow more DC members to invest in real assets. For DC pension funds, the most appealing attributes of real assets include capital preservation, diversification, and capital growth, followed closely by long-term income, inflation-linked income, and a positive ESG impact.
DC funds open the door to real assets
ESG considerations continue to play a role in real asset investment. Globally, a slightly higher proportion of real asset investors report ESG and sustainability are “growing, but not essential” considerations when making investment decisions when compared with a year ago. And only 5% of institutions say they do not take ESG into account at all, down from 7% in 2022.
ESG remains important
Which of the following best describes your organisation's approach to ESG/sustainability within real assets?
Consistent with the findings of Aviva Investors’ study last year, global institutions continue to prioritise investment performance when selecting managers for their sustainable real asset strategies. Performance is especially important among North American institutions, with 81% putting it in their top three criteria when choosing a manager, higher than the figures for Europe and APAC. Institutions in all regions also cite the ability to evidence risk and/or impact and the quality of ESG integration processes as important. Most managers are achieving these objectives, although there is room for improvement. Globally, 75% of institutions say their asset managers are delivering on performance, with this figure broadly consistent across regions.
Performance and impact count when selecting managers
Note: Chart shows top three answers selected by each investor type.
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Aviva Investors’ poll of global institutions found expectations for returns improving across all asset classes; however, the future path of inflation and interest rates continues to cast a shadow of uncertainty over long-term return projections. Return expectations for infrastructure investments, both debt and equity, have risen significantly. This trend likely reflects the global need for infrastructure development, as well as the push for climate change solutions. (See note, below, for an explanation of how the return expectations were calculated.)
Investors expect good returns from real assets this year, especially in real estate equity and infrastructure, but uncertainty around inflation and interest rates clouds the future, according to Aviva Investors’ Real Assets Study 2024.
What annualised risk-adjusted returns do you expect for different real assets and public market asset classes over one, three and five years (top three)?
Just as the top three asset classes show consistent high return expectations, the bottom performers show consistency over three and five years. Nature-based solutions, for example, was ranked in the bottom three performers for returns across all timeframes. However, these results should be taken with caution, as 28 per cent of respondents globally say they don’t know what level of returns to expect for this asset class. Among those who indicated an expectation, most anticipated a rise to annualised returns of five per cent or more over five years. This shows the asset class may yet reveal itself to be attractive as familiarity grows and more organisations seek solutions to decarbonise their portfolios.
Investors are optimistic on the return outlook for real assets across global regions, but North American respondents tend to be more positive across asset classes and timeframes. This upbeat view hinges on expectations of market resilience and a robust recovery in the real estate market. However, it is worth noting that certain real estate sectors, like office and retail space, are currently grappling with lower demand and increasing debt burdens. Real estate equity and infrastructure equity, as well as real estate long income (RELI), see the steepest rises in investors’ return expectations over the coming years. Real estate assets are starting from a lower baseline, with one-year return expectations at 3.2% for real estate equities and 2.9% for RELI.
Rosy outlook rests on recovery
However, the unclear path of inflation and interest rates is casting a shadow over the longer-term outlook for debt. Most forms of debt, including private corporate debt, are expected to deliver solid returns over one year, while investors are less certain on returns over three and five years. Looking ahead five years, a clear divide emerges between regions in terms of return expectations. North American investors anticipate stronger returns across most asset classes, while their Asian counterparts project returns below the global average. European expectations hover around the global average. This regional gap is particularly pronounced for real estate. While one-year return expectations are scattered across asset classes, a clearer trend emerges for three and five-year return horizons, especially among the top-performing asset classes. Return expectations for real estate equity, though scattered for the one-year period, show regional convergence over three and five years. For example, 61% of respondents anticipate returns exceeding 5% over five years. This optimism is particularly pronounced in North America, where 72% expect such returns and a bullish 26% project even higher returns of 10% or more.
Inflation clouds long-term view
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5.2%
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Note: To gauge their return expectations, respondents were asked to choose between illustrative return bands, which are based on historic market data and take into account the potential for both positive and negative market conditions: negative returns; zero-2.9 per cent; three-4.9 per cent; five-9.9 per cent; ten per cent or more (or “don’t know”). Weighted average returns were calculated using the midpoint for each expected return band (e.g., for zero to 2.9 per cent, it is 1.45 per cent) multiplied by the percentage score for that band. The total for all the return bands for a period was then used to give the weighted average return. For the “negative returns” band, a figure of -1 per cent was used, and 11 per cent for the “ten per cent or more” return band. The “don’t know” responses were omitted for all weighted average return calculations.
Aviva Investors’ Real Assets Study 2024 found global investors managing over £20 billion in assets place a strong emphasis on ESG and sustainability factors when it comes to picking their investments. Indeed, most of those polled integrate ESG or sustainability into their decisions and consider it a critical and decisive element in their investment choices.
Real asset investors continue to favour environmental, social and governance (ESG) factors, especially sustainability in real estate, according to Aviva Investors’ Real Assets Study 2024.
Existing asset holders planning to increase exposure
Investors have different objectives they are seeking to achieve from their real asset allocations. For those wanting to optimise ESG impact, the most popular theme cited was decarbonisation, through assets that might help address energy efficiency and carbon emissions or meet net-zero targets. Improving the state of natural capital and biodiversity outcomes also gathered wide support from an impact perspective. Through a return lens, respondents expect to achieve the highest financial rewards from investing in emerging technologies. Return expectations are also overwhelmingly positive for energy efficiency and decarbonisation solutions, and supported widely across all regions. Interest in the return potential of assets supporting cities and communities was also cited, and particularly high in the APAC region.
Despite the positive return expectations for the energy efficiency and decarbonisation themes, investors showed uncertainty about the actions needed to achieve their long-term sustainability commitments. Appetite to take on the decarbonisation challenge is mixed; some investors said they have no plans in place for a net-zero commitment and no intention of formulating them. While this group was dominated by respondents from North America, many respondents from APAC and Europe are still trying to assess how feasible explicit carbon commitments are. What is clear is that many institutions are still working to define net-zero policies and develop the processes linking them with real asset allocations and net-zero goals.
Commitments to net zeroers
The survey’s attempt to identify the most sought-after types of sustainable real assets delivered an important conclusion – interest is broad. Furthermore, the number of potential buyers for sustainable real assets significantly outstrips those looking to reduce their holdings.
When assessing the most salient features to consider when investing in sustainable real assets, investors highlighted the opportunities to generate financial returns, alongside other ESG factors. The dominant factors driving allocations to sustainable real assets were “attractive opportunities”, as cited by more than a quarter of those polled in the survey. This perceived return potential received greater attention than any other factor, including the need to satisfy external regulatory pressures.
Which themes do you see as providing the most ESG impactand the best financial returns (select the top three)?
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20%
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of North American respondents see strategies that prioritise financial returns while integrating awide range of ESG factors as the most appealing category
64%
The survey asked where respondents “had exposure [to sustainable real assets] but planned to raise it,” and the response was overwhelmingly positive across regions. Between 25% and 50% of respondents expressed plans to raise their exposure in various areas. Interestingly, the nascent area of nature-based solutions saw the highest score in this area, followed by private debt financing with a sustainability or renewable focus.
Investors plan to raise exposure
Low-carbon, new-build real estate
Decarbonising existing assets
Biodiversity and/or nature-based solutions
Renewable infrastructure
Social housing and infrastructure (i.e. schools, hospitals)
Provision of loans/private debt financing with a climate transition or sustainability focus
Fibre broadband/ data centres
Appetite for sustainability among real asset investors is strengthening, across all regions, but data quality still needs to improve. Signs over how real asset investors are engaging with sustainability are most evident around allocations to climate transition-aligned investments in real estate and infrastructure.
Interest in sustainable investing is continuing to strengthen among real asset investors, but there remain challenges in this area, according to the Aviva Investors’ Real Assets Study 2024.
Ranking most appealing real asset investments for impact
Encouragingly for the energy transition, appetite for renewable infrastructure – windfarms, solar panels, renewable-linked energy grids etc – shows no signs of diminishing. Nearly half of all respondents (49%) already have exposure to renewable infrastructure and are planning to raise this, with 14% more planning to invest for the first time. Tellingly, there are signs of greater investment than divestment in these assets. Across all regions of respondents, numerous clusters of investors currently without renewable infrastructure exposure – from 13% in APAC to 14% in Europe and 17% in North America – indicated they were considering allocations to the sector. This far outweighs the overall number of respondents, 11%, planning to trim back their holdings.
Though more capital is being earmarked for sustainable assets, this has not necessarily translated into confidence. The study found many investors remain unsure of what they need to do to influence climate change. When asked about the actions needed to meet their long-term sustainability commitments, 53% of all respondents said they were “not confident at all” or “somewhat unsure”. Specifically, within the context of decarbonisation, appetite to engage with this theme was somewhat mixed among investors. Although 57% of respondents have made a net-zero commitment and a quarter more were exploring feasibility, 17% of respondents said they had no plans to set such targets. This reflects that more work is needed to define net-zero policies and develop processes that link ESG aspirations with real asset allocations. To shed more light on investors’ misgivings around sustainable real asset investment, insights were sought on the risks they associate with this sector. Tellingly, 47% of all respondents – regardless of region – identified the difficulty of measuring and evidencing real assets’ positive impact as a material risk for the sector. ‘Greenwashing’ is identified as a risk by 52% and 54% of respondents in North America and APAC respectively. This is why the ability to evidence impact has grown in importance. Respondents also highlighted concerns around the potential for unsatisfactory performance of sustainable real assets and high valuations as material risks for this theme.
Doubts over success
Sustainable investment within real assets isn’t restricted to renewable energy and decarbonisation. The Aviva Investors study revealed that investors are recognising the other ways sustainability can be incorporated within their portfolios, with 19% of respondents ranking social infrastructure highly for impact. Interestingly, 62% of North American investors – more than in other regions – registered a strong appetite for social infrastructure investment which is at odds with other poll results suggesting social value is not a priority in that market. This suggests the framing of these assets, and their ability to generate high financial returns, could be a factor. Elsewhere, strong interest was registered in nature-based solutions such as forestry and biodiversity. Over a quarter, 27%, of all investors have allocated to this theme with plans to raise exposure while 25% more are keen to make their first investments in this space. Although nature-based solutions were only ranked highly among sustainable assets by 12% of investors, this shows recognition of this theme is growing, albeit from a low base. Encouragingly, most respondents were satisfied with the way their managers integrate ESG factors – with over 60% of investors in each region responding as such. However, there is still work to be done on this front and 22% of respondents in North America are not satisfied with ESG integration as it is conducted in their investment process.
A broadening theme
According to the Aviva Investors’ Real Assets Study 2024, 24% of respondents identified these as the most appealing of real assets when ranked in terms of their ESG impact.
Climate-transition aligned investments in real estate and infrastructure
Social infrastructure (investments in health and education)
Social housing/affordable housing schemes
Urban regeneration infrastructure
Nature-based solutions
Urban regeneration real estate
Improving broadband access in small urban centres/rural areas 4
Tellingly, 47% of all respondents – regardless of region – identified the difficulty of measuring and evidencing real assets’ positive impact as a material risk for the sector
An environment where interest rates remain high has been identified as the key concern for most real asset investors, according to the Aviva Investors’ Real Assets Study 2024. This sentiment was shared by respondents across all regions, with 60% of investors picking this out as the key risk for their holdings.
Despite their inflation protection and diversification qualities, real assets’ vulnerability to sustained high interest rates is the top concern for most investors according to the Aviva Investors’ Real Assets Study 2024.
High interest rates have already become a point of issue for investors and put some real assets, notably US commercial real estate, under pressure in 2023. It was against this backdrop that a mini banking crisis unfolded in the US, with several regional US banks collapsing as a result. Though contagion was limited, and a widespread banking crisis did not materialise, this brought into sharp focus the impact that high rates are having on real assets. This saw high interest rates picked out as the most concerning risk among each region polled: North America, Europe and APAC. The second most concerning risk was a global recession, which was picked out by 51% of all respondents. However, regional nuances were revealed elsewhere when respondents were asked to identify other risks. Overall, liquidity risks were picked out by 34% of all respondents as being a challenge for real assets over the next 12 months but this resonated the strongest for those from North America. Specifically, nearly half of North American respondents (47%) highlighted liquidity risks as a concern, while political risks and market volatility were the third most selected issue for European and APAC respondents, respectively. This aligns with the challenges that respondents identified as stopping them from increasing allocations. Over half of respondents (58%) in North America revealed it was challenging finding suitable opportunities for them to invest in, a higher rate than in other regions. Most European investors, however, cited high transaction costs as the key barrier – with 49% of them picking this as the main concern.
The impact of high rates
Though trends were broadly concurrent among all regions, there were specific nuances in answers from North American respondents which reflects a greater hesitancy on that continent. In the 2023 study, it was revealed fewer North American respondents anticipate growth in their real asset exposure compared to the year before (60% and 70% respectively). At the same time, North American investors have become more likely to trim exposure. In 2022, only 6% of respondents in the region revealed plans to decrease real asset exposure over the next 24 months, compared to 13% in 2023. Little difference was recorded in the responses from APAC and European investors between these two years.
North American real asset hesitancy
Generally, finding suitable opportunities was the most selected barrier (46%) to new allocations chosen by respondents across all regions. This reflected the fact that real asset investors are increasingly seeking to take into consideration non-financial metrics when making investment decisions. The Aviva Investors study sought respondents’ views on sustainability, and it is clear this is now far from a niche concern. It was revealed that 17% of investors globally regard ESG as a critical and deciding factor, with less than 5% of respondents not considering sustainability when making real asset investment decisions. This reflects the wider context that ESG and sustainable investment in general has become more mainstream throughout the financial services world. Indeed, the majority of respondents overall (57%) confirmed they are committed to net zero targets. However, there are challenges in engaging with sustainable real assets as under half (47%) of respondents reported being confident in identifying what actions are required to meet long-term net zero and sustainability commitments via this asset class. For instance, 30% of both North American and APAC investors admitted to a lack of in-house experience as being a significant barrier to engaging with these assets. At the same time, 73% of all respondents highlighted a desire to prioritise financial returns while investing in sustainable real assets. This represents a challenge for real asset investors – many want to prioritise financial returns and though they want to do so while championing sustainability, it is clear uncertainty reigns as to how to achieve both. Against this backdrop, it is easy to see how investors are struggling to find suitable real asset opportunities.
Finding the right opportunities
95%
of respondents consider sustainability when making real asset investment decisions
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of investors globally regard ESG as a critical and deciding factor
